FT: Investors pass the buck on governance VEA: No They Don’t

Rana Foroohar’s column on institutional investors and corporate governance is internally inconsistent and factually wrong. She says that institutional investors “outsource” their proxy votes to the proxy advisory firms. But anyone who understands finance and markets has to recognize that (1) institutional investors rely on a wide range of sources for making all investment decisions, including proxy voting, and that they make decisions about the sources they rely on based entirely on their assessment of value, (2) the data show that institutional investors like the analysis of the proxy advisory firms but often depart from their recommendations, especially on complex and controversial votes like proxy contests and business combinations, and (3) the votes she focuses on, regarding CEO pay, are advisory only and can be disregarded by the board

In other words, even if they do “outsource” their fiduciary obligation (no evidence this is the case), the vote is not binding on the company, which can ignore it.

She writes:

Consider the recent saga of Credit Suisse. Over the past couple of years, the company has been trying to orchestrate a turnround, settling a big fine over dicey (pre-financial crisis) mortgage-backed-security deals with the Department of Justice, offloading bad assets and restructuring the business. None of this is good for share price in the short term, but it was necessary. No surprise, then, that the Credit Suisse management team was disappointed when proxy advisers opposed its corporate pay plan, citing 2016 losses, despite the fact that the top brass took a 40 per cent cut in its own compensation as part of the turnaround effort. “It was just totally demotivating for staff and management,” says one insider. “We could have left these decisions for someone else to worry about later and there would have been no issue over pay.”

ISS stands by its recommendation, and adds that it does take into account other performance metrics, like return on invested assets, revenue growth, and so on. But TSR is “what investors want to see,” says Patrick McGurn, special counsel at ISS, and therefore determines a yes-or-no vote on pay. “We’ve talked to our clients about using non-financial performance to judge pay, but they want something quantifiable. You can’t just have some vague judgment about it.”

A couple of points here. First, Foroohar completely undercut her own argument by showing that it is the institutional investors and proxy advisory service clients who tell ISS what to do, not the other way around. Second, if, indeed, the turnaround will provide benefits to investors, that is when the benefits should be realized by the employees as well, and there are pay plans that provide all the right incentives to do so.